Momentum investing has established itself as one of the most successful and enduring forms of investment strategy worldwide. With a history spanning over 215 years, this approach has consistently delivered impressive results. In simple terms, momentum refers to the tendency of stocks that have recently performed well to continue their upward trajectory, while underperforming stocks are likely to continue their slump. Drawing an analogy from cricket, momentum can be likened to a player’s form—those in form keep scoring runs and moving forward, while those out of form struggle to contribute. This article explores the concept of momentum investing and its remarkable track record, highlighting the MSCI World Index and the Momentum Index as illustrative examples.
Momentum investing revolves around the principle of capitalizing on the persistence of stock performance trends. It involves identifying stocks that have exhibited strong recent performance or are considered winners, with the expectation that their positive performance will continue in the near future. Conversely, stocks that have demonstrated weak performance or are deemed losers are expected to continue underperforming in the short term.
Momentum investing has yielded substantial profits on a global scale, solidifying its reputation as a formidable investment approach. Notably, the MSCI (Morgan Stanley Capital International) provides a comprehensive suite of indexes that cover various investment strategies. Two prominent indexes within the MSCI family—the MSCI World Index and the Momentum Index—serve as powerful indicators of the effectiveness of momentum investing.
The MSCI World Index serves as a broad measure of equity market performance across multiple countries and regions. It includes large and mid-cap stocks from developed economies and provides a comprehensive snapshot of global market trends. Investors leveraging a momentum strategy can benefit from the MSCI World Index by identifying winning stocks across different regions and sectors, thereby enhancing their chances of capturing market upswings.
Looking back at the performance of the MSCI World Index and the Momentum Index since 1994, it is clear that momentum investing has been a highly lucrative strategy. Investors who allocated their funds to the Momentum Index witnessed a staggering 20-fold increase in their investment. In contrast, those who invested in the MSCI World Index experienced a still impressive, yet comparatively modest, tenfold growth. This significant discrepancy highlights the powerful impact of momentum investing on wealth accumulation.
The success of momentum investing is not limited to global markets alone; it extends to Indian markets as well. In India, indices such as the Nifty 500 and Nifty 50 have delivered annual returns of approximately 12-12.25%. However, momentum investing in India offers even greater potential for wealth creation. The existence of two momentum indexes, with returns ranging between 18% and 21%, illustrates the immense alpha generated by this strategy. These returns, compounded over a considerable period, translate into impressive long-term wealth accumulation.
A closer examination of the chart reveals the striking divergence in performance between various indexes in India. The blue line represents the Nifty 150 and Midcap 150 indexes, while the green line represents the Momentum 50 index. In comparison, the orange and grey lines depict the Nifty 50 and Nifty 500 indexes, respectively. The substantial difference in growth becomes apparent, with the Momentum 50 index outperforming the Nifty 50 and Nifty 500 indexes by a remarkable margin. Over time, this discrepancy accumulates to a staggering 10-11 times more wealth creation through momentum investing, representing a remarkable 32-fold increase in investment value.
The phenomenal success of momentum investing showcased by these charts emphasizes its potential for generating substantial returns. By systematically identifying winning stocks and swiftly eliminating underperforming ones, investors can benefit from the persistence of stock performance trends. Momentum investing offers a unique opportunity to compound returns over the long term, amplifying the growth of investment portfolios and enabling investors to accumulate substantial wealth.
Identifying momentum in the financial markets can be challenging for many investors. However, there are two key approaches to understanding and utilizing momentum: time series momentum and cross-sectional momentum. Drawing parallels with cricket, we can better comprehend these concepts. Absolute momentum, akin to a breakout player making headlines with an outstanding performance, represents time series momentum. On the other hand, relative strength, or cross-sectional momentum, focuses on comparing the performance of different stocks or assets. This article explores the differences between these two approaches and highlights their significance in momentum investing.
Time series momentum, often referred to as absolute momentum, emphasizes the performance of individual stocks or assets over time. It is akin to a cricket player who catches everyone’s attention with a standout performance in a single match, resulting in widespread recognition. This form of momentum investing seeks to capitalize on such breakouts or significant price movements, with traders often engaging in breakout trading strategies. A substantial price surge or a notable price candle may trigger interest in a stock, leading to the perception of momentum. While this represents one facet of momentum investing, it is important to note that it is only half of the story.
The other critical aspect of momentum investing is cross-sectional momentum, which involves assessing the relative strength of different stocks or assets within a given period. Rather than focusing solely on individual stock performance, cross-sectional momentum seeks to identify and select stocks that exhibit strength compared to their peers. In the cricket analogy, this can be seen as comparing the performance of various players in a team. Investors analyze the relative strength of stocks or assets within a particular sector or market, aiming to identify those with superior performance relative to their counterparts. This approach helps uncover opportunities by evaluating the relative performance dynamics across a broader spectrum.
Successful momentum investing requires a comprehensive understanding of both time series and cross-sectional momentum. While absolute momentum identifies breakout opportunities, it represents only a partial picture of momentum investing. The complementary component, cross-sectional momentum, adds depth by assessing relative strength, enabling investors to select stocks or assets that outperform their peers. By combining these two perspectives, investors can build a more robust momentum strategy that encompasses both individual stock performance and the broader market context.
By simplifying the process and focusing on long-term investment through systematic investment plans (SIPs), retail investors can harness the power of momentum investing.
Retail investors who do not have the time or knowledge for active trading can turn to systematic investment plans (SIPs). SIPs allow investors to contribute fixed amounts at regular intervals into mutual funds or exchange-traded funds (ETFs). By investing in funds that follow a momentum-based approach, retail investors can passively participate in the benefits of momentum investing without the need for constant monitoring or active trading.
These funds aim to identify and invest in stocks or assets that exhibit strong momentum characteristics. By choosing funds with a proven track record of outperforming the market through momentum-based selection, retail investors can benefit from the expertise of professional fund managers.
One of the key principles of momentum investing is to ride the trend rather than attempting to time market bottoms or tops. Retail investors should adopt a patient and long-term perspective, recognizing that momentum strategies may experience short-term fluctuations. By staying invested and allowing the momentum to play out over time, investors can increase their chances of capturing significant returns.
Mutual funds offer a promising avenue for retail investors to tap into the potential of momentum investing. With two distinct options available, passive funds and active funds, investors can align their investment strategies with their preferences. Passive funds, such as the Mid Cap 150 Momentum 50 and Nifty 200 Momentum 30, track momentum indices and provide a hassle-free, low-cost approach. On the other hand, active funds, like the Samco Active Momentum Fund, employ real-time active management to outperform the benchmark indices. This article highlights the advantages of both options and emphasizes the benefits of setting up systematic investment plans (SIPs) for long-term wealth creation.
Passive funds based on momentum indices offer retail investors a straightforward way to participate in momentum investing. These funds mirror the performance of the Mid Cap 150 Momentum 50 and Nifty 200 Momentum 30 indices, capturing the strength of trending stocks. By investing in these passive funds, investors can gain exposure to a diversified portfolio of momentum-driven stocks without the need for active decision-making or extensive research.
For investors seeking enhanced returns through active management, the Samco Active Momentum Fund presents a compelling opportunity. The first and only active momentum fund in India, it combines real-time active management with the principles of momentum investing. The objective is to generate alpha and outperform the Nifty momentum indices through skilled decision-making and timely portfolio adjustments. Investors can participate in this fund through a lump sum investment during the new fund offer (NFO) period or by registering for SIPs.
Investors aiming to capitalize on the potential of momentum investing should consider setting up SIPs for long-term wealth creation. By consistently investing fixed amounts over an extended period, such as 10, 15, 20, or 30 years, the power of compounding can significantly amplify returns. A comparison of a normal SIP with a momentum SIP demonstrates the substantial difference in outcomes. While a regular SIP with a 12% return resulted in a profit of 3 crore 40 lakhs over 30 years, a momentum SIP with a 20% return generated a profit of 26 crores, a staggering difference of 10-12 times.
Investors seeking active management and the potential for substantial wealth creation can take advantage of the Samco Active Momentum Fund. During the NFO period, investors have the opportunity to make a lump sum investment or register for SIPs. It is important to note that no lump sum investments will be accepted after the NFO period, making it crucial to take advantage of this limited opportunity.
The Samco Active Momentum Fund presents a unique opportunity for investors to engage in momentum investing and potentially outperform the Nifty. With the option to invest through lump sum or set up SIPs during the NFO period, investors can leverage active management and the principles of momentum to build substantial wealth.
It is important to note that the last date for lump sum investments is 29th June, after which no further lump sum investments are accepted. By taking advantage of this limited opportunity and harnessing the expertise of Samco, investors can tap into the potential of momentum investing and strive for alpha in their portfolios. For those seeking to make the most of momentum investing without the need for extensive analysis, the Samco Active Momentum Fund provides a valuable avenue.
Whether you are an experienced investor or a beginner looking to enhance your wealth creation, investing in momentum strategies can be a rewarding approach. So, seize the momentum, consider your investment options, and embark on your journey towards financial success.